Marsh & McLennan Companies, Inc.

Welcome to Marcian McLennan's conference call. Today's call is being recorded. Fourth quarter 2020 financial results and supplemental information were issued earlier this morning. They are available on the company's website at MMC.com. Please note that remarks made today may include forward-looking statements, including certain expectations related to COVID-19 and other matters. Forward-looking statements are subject to risks and uncertainties, and a variety of factors may cause actual results to differ materially from those contemplated by such statements. For a more detailed discussion of those factors, please refer to our earnings release for this quarter and to our most recent SEC filings, including our most recent Form 10-K, all of which are available on the MMC website. During the call today, we may also discuss certain non-GAAP financial measures. For a reconciliation of these measures to the most closely comparable GAAP measures, please refer to the schedule in today's earnings release. I'll now turn this over to Dan Glazer, President and CEO of Marshall McLennan.

Dan Glazer Good morning, and thank you for joining us to discuss our fourth quarter results reported earlier today. I'm Dan Glazer, President and CEO of Marshall McLennan. Joining me on the call today is Mark McGivney, our CFO. and the CEOs of our businesses, John Doyle of Marsh, Peter Hearn of Guy Carpenter, Martine Ferland of Mercer, and Scott McDonald of Oliver Wyman. Also with us this morning is Sarah DeWitt, Head of Investor Relations. 2020 was a year like no other, and Marshall McLennan's response and performance was nothing short of remarkable in the circumstances. The year was characterized by tough choices that we made as a business and as individuals. Our colleagues rose to the occasion and demonstrated resilience, courage, agility, collaboration and empathy in the face of the global pandemic and social unrest. Times like these validate our purpose to make a difference in the moments that matter for our clients, colleagues and communities, and we did exactly that. Our 2020 adjusted EPS growth of 7% is impressive and one of the worst economic recessions ever. Our strong financial performance also enabled us to continue to invest for the future. We continued to develop digital technologies to offer more robust client solutions. We made a number of strategic hires and achieved a record year of acquired revenue at MMA through eight acquisitions with approximately 235 million of annualized revenue. Looking forward, while the global pandemic will most likely dominate at least the first half of 2021, there are brighter days ahead. Our proprietary pandemic navigator model predicts that as vaccines are rolled out and we move closer to herd immunity, Through natural immunity, infection case counts, and vaccinations, the US and UK could see a return to more normal patterns sometime in the back half of the year. As we emerge from the crisis, clients around the world can rely on our expertise in the three areas that are critical for every organization, risk, strategy, and people. The World Economic Forum's Annual Global Risk Report, which was released last week and prepared with the support of Marcia MacLennan and other partners, highlights some of the most likely and impactful risks facing the world today, and we are working with clients to navigate these issues. Marcia MacLennan has collaborated in the preparation of the Annual Global Risk Report for 16 years. In its first edition in 2006, The report warned against the risk of a lethal flu spread by global travel patterns. And in 2015, pandemics were identified as the number two global risk. It also drew attention to the risk of global climate change and cyber threat many times over the past 10 years. This year's report highlights infectious disease, extreme weather, and climate action failure as top impact risks. while social, digital, and economic inequality have ascended as major risks. Marshall McLennan continues to help clients adapt to an evolving risk landscape and navigate long-term secular challenges while at the same time providing advice and solutions for their most pressing issues of the day. Let me spend a moment on current P&C insurance market conditions. The fourth quarter marks the 13th consecutive quarter of rate increases in the commercial P&C insurance marketplace. The March global insurance market index showed price increases of 22% year-over-year versus 20% in the third quarter. Global property insurance was up 20%, and global financial and professional lines were up 47%, while global casualty rates were up 7% on average, and U.S. workers' compensation pricing declined modestly. Keep in mind, our index skews to large account business. However, U.S. small and middle market companies insurance pricing continues to rise as well, although the magnitude of price increases is less than for large complex accounts. At the January renewals, commercial insurance market conditions remained challenging across products and regions. Risks are able to be placed, although at higher prices, and in some cases with less coverage and stricter terms. Insurance carriers continue to push for rate increases in the face of losses low returns, and interest rates. At the January 1st reinsurance renewal, while pricing ultimately settled at the lower end of early predictions, negotiations were lengthy and complex with a significant focus on coverage and structure. Traditional dedicated reinsurance capital increased slightly as calculated by Guy Carpenter and A.M. Best. However, alternative capital was down marginally. The willingness of providers to deploy capital improved over the very constrained mid-year 2020 conditions. Capacity was generally available in both property and casualty lines. Non-loss impacted property programs saw pricing up mid-single digit to low teens in the U.S. and low single digits in EMEA and Asia Pacific. Significant recent loss activity drove pricing up in excess of 30% on some segments of impacted business. Casualty renewals were subject to increased underwriting rigor due to ongoing pressures of social inflation and challenging experience. Price increases continue to be pervasive in both the P&C insurance and reinsurance markets overall. While capital levels remain reasonable, 2020 saw elevated loss activity, a historic pandemic and low interest rates. Periods of rising PNC rates, changing risk environment and uncertainty present challenges for our clients and the value of our advice and services becomes even more critical. Now let me turn to our fourth quarter financial performance. We generated adjusted EPS of $1.19, which caps a strong year for Marshall McLennan despite the ongoing global pandemic and economic recession. Total revenue increased 4% versus a year ago and rose 1% on an underlying basis. Underlying revenue grew 3% in RIS or 4% excluding the decline in fiduciary interest and declined 1% in consulting. Marsh grew 4% in the quarter on an underlying basis, finishing the year strong. Back Carpenter grew 5% on an underlying basis in the quarter. Mercer underlying revenue declined 3% in the quarter, and Oliver Wyman grew by 4% as new business picked up into the end of the year. The overall fourth quarter saw adjusted operating income consistent with prior year, with our adjusted operating margin down 60 basis points year over year. As we mentioned on our last earnings call, we expected to see a sequential uptick in expenses in the fourth quarter. The increase reflects employee-related actions that would have taken place over the course of the year but were delayed in the thick of the pandemic, an increase in variable compensation accruals due to Oliver Wyman's better-than-expected performance, as well as strategic hiring and other investments. As we consistently say, it is important not to overemphasize a single quarter and rather look at performance over a longer period of time. For the full year 2020, adjusted operating income increased 9% with 120 basis points of adjusted operating margin expansion. RIS achieved 170 basis points of adjusted operating margin expansion for the full year, while consulting gained 20 basis points. For the full year, adjusted EPS grew 7%. Overall revenue grew 3% or 1% on an underlying basis. RIS underlying growth of 3% was driven by growth of 3% at Marsh and 6% at Guy Carpenter, partially offset by a significant decline in fiduciary interest. Consulting revenue held up well despite the more discretionary nature of revenue and higher economic sensitivity, with Mercer's underlying revenue down 1% and Oliver Wyman down 4% for the full year. As we look to 2021, we are well positioned given the resilience of our business, strong demand for our services, and our expectation for a better economic backdrop. For the full year 2021, we expect to deliver underlying revenue growth in the 3% to 5% range, margin expansion, and solid growth in adjusted EPS. This is based on our outlook today, which assumes the global economy recovers in 2021 with a return to positive economic growth in the second quarter. 2021 represents the 150th anniversary of Marshall McLennan. Few enterprises endure, let alone prosper, for a century and a half. Our predecessors helped our clients navigate through world wars, depressions, and yes, pandemics. From our very beginning, we developed unique solutions and markets to address complex issues. We helped enable the development of major industries by creating insurance solutions for the automobile, telephone, and electric power sectors We pioneered innovative pension products that enhance retirement security. Decades ago, we developed some of the first space protection programs. Today, we are boldly working with governments around the world on a new type of public-private partnership to help address systemic risk from pandemics. We are also at the forefront of tackling society challenges such as cybersecurity, the protection gap, healthy societies, the retirement gap, and climate resilience. Our growth in financial performance over this period was also outstanding. At the beginning of the 20th century, we had approximately 20 employees and less than $1 million of revenue. Fast forward to today, and we have over 76,000 employees in 130 countries and over $17 billion of revenue. Since going public in 1962, our financial returns have been exceptional with significant earnings growth. During this time, our revenues, adjusted operating income, and adjusted EPS all have grown by a double-digit CAGR with a share price return CAGR over 10% annually. These stock returns meaningfully outpace the S&P 500 and are testament to the value that Marshall McLennan delivers for clients, colleagues, and shareholders. We intend to use the occasion of our 150th anniversary to celebrate our history, chart our future, and demonstrate indeed our commitment to the community. To that end, we announced earlier this month that we have committed to be carbon neutral as a company in 2021 and will reduce our carbon emissions by 15% by 2025. Over the balance of the year, we will roll out other initiatives, including fellowships for racial and social justice. As 2020 has powerfully demonstrated, the age of risk has really just begun. We want to preserve the best of what we have learned in 2020 about the importance of resilience, flexibility, and empathy, and then build on that foundation with a relentless spirit of innovation to shape the future. And one thing at Marshall McLennan will never change. We put clients at the center of everything that we do. With that, let me turn it over to Mark for a more detailed review of our results.

Thank you, Danny. Good morning. We're pleased with our fourth quarter and full year results, which were strong despite the challenges of 2020. We grew our top line, delivered solid earnings growth, and entered 2021 with a strong balance sheet and liquidity position. Consolidated revenue increased 4% in the fourth quarter to $4.4 billion, reflecting underlying growth of 1%. Operating income was $571 million, while adjusted operating income was $855 million. Our adjusted operating margin decreased 60 basis points to 21.3 percent. GAAP EPS was 73 cents, and adjusted EPS was $1.19. Looking at risk and insurance services, fourth quarter revenue grew 6 percent to $2.5 billion and was up 3 percent on an underlying basis or 4% excluding the impact of a decline in fiduciary interest. We are pleased with this excellent finish to the year, which demonstrates the strength and resilience of our business in the face of the pandemic. Adjusted operating income decreased 5% to $525 million, and the adjusted margin contracted 220 basis points to 23.5%, reflecting the expected increase in expense in the fourth quarter. For the year, revenue was $10.3 billion, an increase of 8%, with solid underlying growth of 3%. Adjusted operating income growth for the year was impressive at 14%, and our adjusted operating margin in RIS increased 170 basis points to 28%. At March, revenue in the quarter rose 7% to $2.4 billion, increasing 4% on an underlying basis. In the U.S. and Canada division, underlying growth was 7% for the quarter and 5% for the full year, driven by strength across the portfolio. 2020 represents the third straight year of 5% or higher underlying growth in U.S. and Canada. In the international division, underlying revenue was flat in the quarter, with Latin America up 3%, Asia Pacific up 1%, and EMEA down 2%. For the full year, revenue at Marsh was $8.6 billion, an increase of 7% or 3% on an underlying basis. Guy Carpenter's revenue was $162 million, an increase of 5% on an underlying basis for the quarter, representing a great finish to a strong year. The performance in the quarter benefited from growth at GC Securities, as well as strength in new and renewal business across our regions. For the year, revenue was $1.7 billion, an increase of 15% or 6% on an underlying basis. The full year growth was well balanced with all businesses producing strong results. In the consulting segment, fourth quarter revenue increased 1% to $1.9 billion with an underlying revenue decline of 1%. Consulting operating income was 179 million, and adjusted operating income was 387 million, up 8%. The adjusted operating margin was 21.4%, an increase of 170 basis points versus a year ago. For the year, revenue was 7 billion, a decrease of 2% on an underlying basis. Adjusted operating income for the year declined 2% to 1.2 billion, while our adjusted operating margin increased 20 basis points to 18.8%. Mercer's revenue was $1.3 billion in the quarter, representing a decrease of 3% on an underlying basis. Wealth decreased 1% on an underlying basis, with an increase in investment management offset by a decline in DB. Our overall assets under management continued to grow, and at year end exceeded $357 billion, up 11% sequentially and 17% year over year. Health revenue declined 2% on an underlying basis in the fourth quarter, reflecting headwinds from higher unemployment levels, along with a tough comparison to a strong quarter for project work in the fourth quarter of 2019. Career revenue declined 7% on an underlying basis. For the year, revenue at Mercer was $4.9 billion, a decrease of 1% on an underlying basis. Oliver Wyman's revenue in the fourth quarter was $590 million, an increase of 4% on an underlying basis. The stronger than expected results were driven by increased client demand across most segments of the business. We are pleased with the sequential improvements of positive underlying growth to finish out the year, although we recognize the environment remains uncertain. For the full year, Oliver Wyman's revenue was $2 billion, a decrease of 4% on an underlying basis. Adjusted corporate expense was $57 million in the quarter. In the fourth quarter, we reported $284 million of noteworthy items, the majority of which are related to JLP. Included in this total are 70 million of JLT integration costs, 13 million of JLT acquisition-related costs, 46 million of other restructuring costs, and 161 million related to a legacy JLT E&O in the UK. This E&O relates to an industry-wide review commenced by the FCA in 2014. The FCA focused on the suitability of financial advice provided to individuals by a number of companies, including JLT, relating to enhanced transfer value exercises that in some cases date back to 2001. At the time of the JLT acquisition, a gross liability of approximately $77 million had already been recorded. This latest update reflects our best estimate of the ultimate liabilities. We expect this gross liability to be partially offset by insurance recoveries from JLT's insurers and indemnification claims. As we typically do on our fourth quarter call, I will give a brief update on our global retirement plans. Cash contributions to our global defined benefit plans were $143 million in 2020 compared to $122 million in 2019. We expect cash contributions in 2021 will be roughly $124 million. For 2021, based on our current expectations, we anticipate our other net benefit credit will increase modestly year over year. Investment income was $25 million in the fourth quarter on a GAAP basis and was $11 million on an adjusted basis. For the full year 2020, our GAAP investment income was a loss of $22 million, and adjusted investment income was a gain of approximately $6 million. The differences between GAAP and adjusted primarily relate to mark-to-market adjustments on our remaining investment in Alexander Forbes, which we exclude from our adjusted results. For 2021, we expect only modest investment income on an adjusted basis. Our effective adjusted tax rate in the fourth quarter was 24% compared with 23.4% in the fourth quarter last year. For the full year 2020, our adjusted tax rate was 24.4% as compared to 24.1% for the full year 2019. Excluding discrete items, our adjusted tax rate for the full year was approximately 25.3%. When we give forward guidance around our tax rate, we do not project discrete items which can be positive or negative. Based on the current environment, it is reasonable to assume a tax rate between 25 to 26% for 2021. We made great progress in 2020 on our integration of JLT and have exceeded the key milestones we laid out when we announced the transaction. We incurred $70 million of JLT integration and restructuring costs in the fourth quarter, bringing the total to date to $586 million. The remaining work to be done in 2021 consists primarily of ongoing technology application migrations and the further consolidation of real estate. Through year-end 2020, we have exceeded the estimated savings of $350 million. We now expect to achieve approximately $425 million of savings by the time the integration is completed in 2021. We expect to incur approximately $650 million of cash costs to generate these savings. In addition, we continue to expect approximately $75 million of non-cash charges. We ended the year with $2.1 billion of cash due to the strength of our cash flow from operations and efforts made during the crisis to improve working capital. Our strong cash generation during the year enabled us to raise our dividend, complete a record level of acquisition activity at Marsh & McLennan Agency, and stay on pace with our deleveraging plan with $1.5 billion of total debt repaid in the fourth quarter. Total debt at the end of the year was $11.3 billion, down from $12.7 billion at the end of the third quarter, reflecting the repayment of $700 million of senior notes, the prepayment of $300 million floating rate notes due in December 2021, and repayment of the remaining $500 million due on our term loan. Our next scheduled debt maturity is in July, when $500 million of senior notes mature. Interest expense in the fourth quarter was 128 million. Based on our current forecast, we expect approximately 119 million of interest expense in the first quarter of 2021. In line with our prior commentary, we did not repurchase any shares in the fourth quarter of 2020. As we look to 2021, while uncertainty remains high, the combination of our available cash and expected cash generation positions us well for a year of significant capital deployment. Based on our outlook today, we currently expect to deploy approximately $3.5 billion of capital in 2021 across dividends, debt reduction, acquisitions, and share repurchase. Due to our debt reduction in Q4, we expect only a modest amount of debt pay down in 2021, which will complete our deleveraging. We've consistently stated that we favor attractive acquisitions over share repurchases, as we view high-quality acquisitions as the better value creator for shareholders and the company over the long term. Our track record is good, as evidenced by our high team's return on invested capital over the past three years. We expect to resume share repurchases in 2021 and the ultimate level of share repurchases will depend on how the M&A pipeline develops. Uses of cash in the fourth quarter totaled $365 million and included $124 million for acquisitions and $241 million for dividends. For the full year 2020, Uses of cash totaled $1.8 billion and included $877 million for acquisitions and $943 million for dividends. In summary, we are proud of the resilience, courage, and agility of our colleagues in a year that presented unique challenges. As we look forward to 2021, our outlook is for another year of strong performance. And with that, I'm happy to turn it back to Dan.